For Airbnb hosts, determining whether you should be considered as a real estate professional is very important as it can have a major impact on your tax liabilities. Here is what a real estate professional is and how this status affects how much in taxes you will have to pay each year.
What is a Real Estate Professional?
According to the IRS, a real estate professional is a taxpayer who spends the majority of his or her time in real property businesses. To meet this specification, the taxpayer must provide more than one-half of his or her total personal service in real property businesses or trades in which he or she participates (Test 1) and perform more than 750 hours of services during the tax year (Test 2). In order for the IRS to determine whether or not a taxpayer should be considered as a real estate professional, the taxpayer must meet both of these tests. Real property businesses or trades consist of real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage.
In determining whether you qualify as a real estate professional, the IRS will treat your activities related to each individual rental property as a separate activity, or separate business, unless you make the election to have all of those interests treated as a single activity.
Then you must meet both tests for each property separately in order to be considered as a real estate professional with respect to that particular property. In addition, qualifying for one property does not automatically mean that you will be considered as a real estate professional for other properties that you rent out.
You should also know that you don’t have to have a real estate license in order to be considered as a real estate professional by the IRS. You also don’t have to work full time in real estate to be considered as a real estate professional.
The benefit of being treated as a real estate professional is that any net income and losses from your rental activities will be treated as non-passive, permitting deductions against the other income that you earn. These tests are also applied on an annual basis. As a result, you may be considered as a real estate professional some years and not in other years.
Is an Airbnb Host a Real Estate Professional?
An Airbnb Host must meet both of these tests to be considered as a real estate professional for a single property, unless the election is made to be considered as a real estate professional for all rental properties. The Airbnb host must qualify on his or her own; the test results cannot be split between spouses.
As the number of properties in your portfolio increases, it may become more difficult to meet the qualifications for each property because you then have to calculate and maintain time logs in order to have documented evidence of the time that you spend on each rental property. If Airbnb income makes up a large portion of your earnings or you have many properties, you may want to consider taking this election to be considered as a real estate professional for all of your rental activities.
How Personal Services Effect Airbnb Hosts
Personal Services that are provided by an Airbnb Host include renovations, repairs and maintenance. However, this doesn’t mean that you have to perform the work. You could engage in personal services simply by supervising, meeting or planning the activities.
If you qualify as a real estate professional as a result of providing personal services, your income will no longer be considered as passive meaning that you will be considered as self-employed and will be required report your rental income on Schedule C and pay self-employment taxes.
Section 179 Deduction
Section 179 is a provision that can be used by businesses to deduct long-term personal property that is used in the business in the first year, rather than having to depreciate the costs of the property over several years. Section 179 may only be used if your rental activities qualify as a business, meaning that you are required to file Schedule C.
Some of the items that you are permitted to deduct include kitchen appliances and carpets. However, land, land improvements, and air conditioning and heating units may not be deducted. You also have the option to deduct personal property that you use in your rental business if it is not located inside of the buildings that are rented out to guests. These items include computers, telephones, office equipment and furniture, vehicles, maintenance equipment, and vehicles. The limit is $500,000 for 2015 and beyond. However, it is $25,000 for sport utility vehicles (SUVs).
Section 179 is not permitted for property that is acquired and held for the sole purpose of producing rental income, including any rental assets and capital improvements. However, an exception is made for property in hotels, motels, or vacation homes where the guests stay less than 30 days. As a result, qualifying Airbnb hosts can take Section 179.